"We Need To Deal With The Debt" - Goldman CEO Warns Interest Costs On America's Ballooning Borrowings Means "Issues Down The Road"

Goldman Sachs CEO David M. Solomon is the latest business leader to sound the alarm on the Biden administration’s deficit spending, which comes as the cost of making interest payments on America’s ballooning government debt has exceeded spending in both the critical sectors of defense and Medicare.

“I think the level of debt in the United States [and] the level of spending is something that we need a sharper focus on and more dialogue around than what we’ve seen,” the investment banking chief told Bloomberg Television on Monday, adding that if something isn’t done to rein it the spending, it could create problems.

we need to deal with the debt goldman ceo warns interest costs on americas ballooning borrowings means issues down the road
U.S. President Joe Biden, flanked by Secretary of State Antony Blinken (L) and Treasury Secretary Janet Yellen (R), hosts a meeting inside the Cabinet Room at the White House in Washington on Oct. 20, 2023. (Tom Brenner/Pool/Getty Images)

His remarks come as the cost of servicing America’s ballooning government debt reached $514 billion for the first seven months of the current fiscal year, becoming the second largest line item in the budget, and surpassing both the bills for national defense and Medicare spending.

The latest monthly statement from the U.S. Treasury—released on May 8—shows that the $514 billion spent on net interest so far this fiscal year has surpassed spending on both national defense ($498 billion) and Medicare ($465 billion).

Interest spending—now the fastest growing part of the budget—is currently greater than all the money spent on education ($128 billion), transportation ($70 billion), and veterans ($183 billion) combined.

The nonpartisan Committee for a Responsible Federal Budget (CRFB) predicts that, by 2051, spending on interest will be the largest line item in the budget. Currently, only Social Security spending ($837 billion) is greater than what’s being forked over to service the nation’s growing debt.

Rising debt will continue to put upward pressure on interest rates. Without reforms to reduce the debt and interest, interest costs will keep rising, crowd out spending on other priorities, and burden future generations,” CRFB said in a statement.

It comes as a number of economists, business leaders, and lawmakers have issued warnings about out-of-control deficit spending that adds to the debt load.

House Speaker Mike Johnson (R-La.) said in October—the first month of the 2024 fiscal year—that it was already well past time to establish a bipartisan commission to tackle the federal government’s $34.6 trillion debt.

The consequences if we don’t act now are unbearable,” he said at the time. Despite his calls for such a commission, the project remains stuck in limbo.

Many Democrats and left-leaning groups oppose the commission because they fear it would recommend cuts to Social Security, while some Republicans have expressed reluctance out of concern it would be a backdoor way to raise taxes.

No Longer a Pandemic

In his remarks to Bloomberg Television on Monday, Mr. Solomon said that some of the U.S. government’s massive debt-fueled spending in recent years may have been justified to prevent the economy from crashing during the COVID-19 lockdowns. However, he decried the fact that even though the pandemic is no longer a factor, the spending spree continues.

The spending levels … are continuing at a pace that I think is raising our debt level and creating issues for us down the road,” he warned.

President Joe Biden in March unveiled a sweeping $7.3 trillion budget blueprint, which includes raising the corporate income tax rate to 28 percent from 21 percent, and forcing those with wealth of $100 million to pay at least 25 percent of their income in taxes.

The blueprint was panned by Mr. Johnson, who said it reflected an “insatiable appetite for reckless spending.”

Deficit spending in the United States hit $1.7 trillion in 2023, or 6.3 percent of gross domestic product (GDP), according to a recent report from the Congressional Budget Office (CBO). The agency estimated that deficit spending would grow to 8.5 percent of GDP by 2054.

At the same time, CBO projected that America’s debt-to-GDP ratio, which in the 1980s was around 35 percent of GDP, will grow to 166 percent by 2054, while warning that this would pose “significant risks” to America’s fiscal and economic outlook.

Mr. Solomon said that America’s deficit spending is an issue that “deserves a lot of attention.”

“Hopefully, there will be a lot more discussion as we move through the election and into the next administration,” he said, adding that, “we need to deal with the debt and the deficits.”

‘Dollar Will Be Worth Nothing’

Tesla CEO Elon Musk recently sounded the alarm on massive government spending, warning that unless steps are taken to slow down the growth of the U.S. national debt, the dollar will become worthless.

We need to do something about our national debt or the dollar will be worth nothing,” Mr. Musk said in a post on X.

The billionaire tech mogul was reacting to a post about Gen. H.R. McMaster’s warning that the world is on the cusp of World War III while calling for a doubling in defense spending to prepare for potential threats.

Mr. Musk has repeatedly advocated for a negotiated end to the conflict in Ukraine to put a halt to the loss of life.

Like Mr. Musk, billionaire investor Warren Buffett has also warned about the “important” consequences of deficit spending. However, the Berkshire Hathaway founder predicted that, when push comes to shove, the government would opt to raise taxes rather than reduce spending.

“I think higher taxes are likely,” Mr. Buffett said on May 4 at Berkshire Hathaway’s annual shareholder meeting in Omaha.

“They may decide that some day, they don’t want the fiscal deficit to be this large because that has some important consequences. So they may not want to decrease spending and they may decide they’ll take a larger percentage of what we own, and we’ll pay it,” he said.

we need to deal with the debt goldman ceo warns interest costs on americas ballooning borrowings means issues down the road
Warren Buffett (C), CEO of Berkshire Hathaway, speaks to the press as he arrives at the 2019 annual shareholders meeting in Omaha, Nebraska, May 4, 2019. (Johannes Eisele/AFP via Getty Images)

Analysts at the University of Pennsylvania estimate that when the debt-to-GDP ratio hits around 200 percent, it will hit the point of no return—when no amount of future tax increases or spending cuts could prevent the government from defaulting on its debt.

JPMorgan CEO Jamie Dimon has predicted that America’s debt-to-GDP ratio would “hockey stick” upward at some point, meaning rise sharply and become unsustainable after a period of relatively gradual increase.

It is a cliff. We see the cliff. It’s about 10 years out. We’re going 60 miles an hour,” Mr. Dimon said, speaking on a panel at the Bipartisan Policy Center in Washington at the end of January 2024.

The International Monetary Fund (IMF) has also sounded the alarm on the Biden administration’s fiscal stance, warning that its massive deficit spending and ballooning public debt threaten to stoke inflation and—potentially—even spark financial chaos.

via May 14th 2024